A Little Smoke and Mirrors Sends Laidlaw Stock Soaring

The really marvelous thing about Wall Street is its conjurer's capacity for making something out of nothing -- or at least a lot out of very little. This week's example: The overnight rebirth of a 2-cent-per-share penny stock known as Fi-Tek V into a New York-based securities firm named Laidlaw Global ( LAIG). Laidlaw now occupies three floors of swanky, high-rent space at 100 Park Ave. in Manhattan and is now selling for around $25 per share.

We'll get into the details of how all that happened in a minute, as those details say something important about what passes for value in the current bull market. For the moment, however, it is enough to know that the whole fandango was astonishingly easy to pull off.

The promoters of the deal began back in May with a so-called blind-pool penny-stock company with a market value of $640,000. They then tightened up the "public float" with a 1-for-32 reverse stock split, added in a couple of small and obscure securities brokerages, stirred with an eruption of breathless press releases and, in less than three months' time, this 2-cent-per-share penny stock has become a $25-per-share business with a market value of $400 million. Fantastic or what!?

How things like that happen just never ceases to amaze me. Yet even the recent run-up in Internet stocks (which are now crashing back to earth, by the way) pales in comparison to the explosion in Laidlaw Global. Since late April, shares in the blind pool formerly known as Fi-Tek have soared by an unbelievable 4,500%, for which there seems nothing to say but, can you die?

Yet it is too bad that investors haven't been able to get a look at the underlying financials in all this -- almost none are publicly available. Too bad, because the numbers strongly suggest that what has soared aloft so dramatically is not likely to stay there. At its present price of $25 per share, this forgettable operation is being valued by Wall Street at close to 10% the current market value of either PaineWebber ( PWJ) or Bear Stearns ( BSC). In reality, it is assuredly worth less than a fraction of 1% of either company.

Laidlaw is one of those hoary old Wall Street names that everyone seems to have heard of at one time or another but no one can really place anymore -- like Kuhn Loeb or Loeb Rhodes. According to various press clips, none of them very recent, the company traces its lineage back to a securities firm named Laidlaw Adams & Peck, before which time I am not sure humankind had yet begun to record events for future generations.

In any case, it appears that at some point in the 1980s, whatever by then remained of this (presumably) once grand enterprise began to be taken over by foreign money. There was a buyout, and a fellow named Gottfried von Meyern-Hohenberg set himself up in charge. The son-in-law of the king of Morocco put in some money, some Greeks came aboard and, eventually some Chinese got involved.

Along the way, the firm's standards of propriety seem to have taken on a distinctly existentialist tilt, and in 1991 the head of the place, a chap named Walter Twiste, got the heave-ho.

It seems Twiste, as Laidlaw's chief executive, was charged by the Securities and Exchange Commission with somehow arranging to have more than $400,000 of his clients' money be deposited to his own personal accounts while shining the clients along with false assurances that their cash was safely invested in mutual funds. In the way these things often tend to get handled by the SEC, the charges were dropped when Twiste, "without admitting or denying" anything, agreed to quit the firm, leave Wall Street, and never come back.

Not long afterward, some businessmen from the Midwest bought the firm, then eventually wound up selling out to a Taiwanese company whose main man in the U.S., Larry Horner, became the new chairman. His big claim to fame in the job looks to be having presided over the late 1996 acquisition of an obscure Rochester, N.Y., money management firm, Howe & Rusling, not long after which he put a fellow named Stephen Kennard in at Laidlaw as his No. 2. Kennard lasted for a while, and has now been succeeded by a 39-year-old Wall Streeter named Anastasio Carayannis.

Laidlaw itself is so small and obscure that running it barely seems a full-time job. Various documents on file at the SEC, none of which are easily available to the public, show that as of year-end 1998 Laidlaw Global Securities -- the operating arm of the business -- possessed a mere $2.5 million in total assets. Against that was set $1.4 million in liabilities, leaving only $1.1 million in book value.

The filings show that during the year the company lost $3.2 million on its securities operations, even though it reports 50% of Howe & Rusling's own net income, up to $200,000 annually, as belonging to Laidlaw Securities itself. Howe & Rusling is no big deal either, with assets under management of only about $800 million. At a typical management fee of three quarters of 1% and a characteristic net margin of 10%, the company would appear to generate no more than about $600,000 of net income annually.

As a result of all this, Laidlaw's auditors flagged the securities operation with a so-called "going concern" warning -- meaning that reasonable people could look at the numbers and figure the business was headed for bust-o-ville.

That's where the whole blind-pool gimmick enters the story -- as a device that has enabled the gang at Laidlaw to kick this barking dog out the door without letting outside investors (i.e., the public) see what they're actually buying. Blind pools are in fact nothing more than shell companies in which millions of shares of stock are peddled to the public at a penny or two a share by cheeseball investment firms, thereby raising a "blind pool" of a few hundred thousand in capital that can then be used by the company to buy an actual business.

Conversely, privately held companies with going businesses can buy one of these pools, "reverse-merge" themselves into it, and thereby acquire a network of public shareholders without having to sell shares via an initial public offering -- and that is exactly what Laidlaw did. According to Laidlaw's chief financial officer, one Roger Bendelac, the company approached a longtime promoter of blind pools, New York-based Westminster Securities, back in the spring, and asked, in Bendelac's words, if Westminster had "a clean blind pool" that Laidlaw could buy.

The Westminster boys reached in the drawer and drew forth an over-the-counter bulletin-board penny-stock company named Fi-Tek V, which had gone public years earlier and hadn't traded in months. Some 32 million shares were outstanding, and at 2 cents per share they gave the company a market value of $640,000.

So to get the deal going, Fi-Tek -- which basically amounted to three guys named Ron, Frank and Maurice -- agreed to a 1-for-32 "reverse stock split." This reduced the total Fi-Tek shares outstanding from 32 million to 1 million, in the process lifting the value of each share to 64 cents. Then Fi-Tek issued what appears to be 12 million or so new shares of itself, including an obligation to issue some additional shares in exchange for some pre-existing convertible debt. In return, Fi-Tek got back ownership of Laidlaw itself.

Thus ensconced in control of Fi-Tek, which now owned Laidlaw, they instantly changed Fi-Tek's name to Laidlaw Global, emerging overnight as an over-the-counter stock with a 1 million-share float. What's more, since most of the float appears to have been held by Ron, Frank and Maurice, the actual number of shares likely to trade day to day was very small, meaning that even buying demand for a few thousand shares could cause the price to explode.

All this happened in early June, and the Laidlaw boys were apparently so thrilled with the service they got from the gang at Westminster that they wound up issuing 3 million more shares in their new company and acquiring Westminster itself. As with Laidlaw, Westminster had been privately held, so no SEC filings were (or are) available to reveal its full financial picture. But an obscure SEC filing known as a Form X-17a-5 shows that, as of year-end 1998, Westminster had a mere $3.5 million of assets, $1 million of liabilities and $2 million of equity or book value.

Thus, for these two businesses -- Laidlaw and Westminster -- the Fi-Tek bunch paid a total of less than 16 million shares bearing a combined market value of $18 million. In return, they got back two securities businesses with a combined book value of $3 million and a Rochester money management firm with assets of $800 million and net income that is probably somewhere around $600,000.

What's all that worth, really? With large brokerage firms currently being valued on Wall Street at about 3.8 times book value, we may say that smaller operations are worth significantly less and that the Laidlaw and Westminster operations are probably worth somewhere around $3 million to $4 million. And with a typical money management firm like United Asset Management ( UAM) selling for 20 times earnings, the Howe & Rusling operation is probably worth not much more than another $2 million to $3 million -- in other words, a total of about $5 million to $7 million for the whole shebang, which translates to a per-share value of somewhere around half a buck.

Yet there the stock now sits, at a current price of 25, with no financials readily available to anyone to show that the price is preposterous. Will the Laidlaw boys soon be cashing out? You bet. The aforementioned Bendelac tells me the company will be filing full financials with the SEC any day now, along with a registration statement allowing holders of a big chunk of the company to begin bailing out. When that happens, well, frankly it's hard to see this stock going anywhere but down. Ain't it always that way on the Street of Dreams?

You can reach me by e-mail at cbyron1@home.com .

Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column. While he cannot provide investment advice or recommendations, he welcomes your feedback at commentarymail@thestreet.com.